As the artificial intelligence (AI) revolution rolls on, one company that has been leading the juggernaut is Nvidia (NVDA). The trillion-dollar chip designer has been at the forefront of the AI frenzy, and its quarterly earnings report tonight is expected to move not just the wider semiconductor industry, but the entire stock market. So, when Nvidia makes a $76 billion investment into just one small company, growth-minded investors sit up and take notice.
And while the tech titan's investments into a couple of smaller AI chip stocks dominated the headlines, Nvidia's $76B bet outside the semiconductor space is notable for another reason - the Jensen Huang-led company made a huge investment in a stock that's also held by the flagship fund of maverick investor Cathie Wood. In fact, NVDA's betting quite a bit bigger than Cathie, given that Wood's ARK Innovation ETF (ARKK) owns just 13.5 million shares at a current market value of about $170.3 million.
So, why is Nvidia upping the ante on this Cathie Wood stock? Here's a closer look.
About Recursion Pharmaceuticals Stock
Based out of Salt Lake City, Recursion Pharmaceuticals (RXRX) was founded in 2013 by former Rice University PhD graduates Christopher Gibson and Blake Borgeson. Recursion Pharma is a clinical-stage biotech company aiming to "industrialize drug discovery" by using data science and automation to develop new treatments faster and more efficiently.
RXRX currently carries a market cap of $2.72 billion. Along with being the No. 19 holding in ARKK, at roughly 2.17% of the fund's weight, RXRX is also a component of the Russell 2000 Index (RUT).
Recursion Pharma stock is up 23.9% on a YTD basis, easily outperforming the broader market. The shares caught a significant boost last week from news of Nvidia's latest investment, which said last year it would work with Recursion to help accelerate training of the drug company's AI models for drug discovery.
Recursion Earnings Preview
Recursion has yet to be profitable, and in its most recent quarterly results, the company reported a wider-than-forecast quarterly loss. However, for a growing biotech company, this is to be expected to some degree.
In the September quarter, Recursion's losses widened to $0.43 per share from $0.35 in the year-ago period. Revenues also slid by 20% from the previous year to $10.5 million, which management attributed to the timing of workflows from its strategic partnership with Roche-Genentech.
Operating costs rose by 45.4% from the previous year to $110.1 million, which was a primary driver behind the steeper-than-forecast losses. It's worth pointing out that R&D costs were up 71.4% year-over-year, and increased spending here is generally seen as a positive for a biotech company like Recursion, which must always innovate to expand and upgrade its capabilities.
The company ended the September quarter with a cash balance of $397 million, while its long-term liabilities remained almost unchanged from the beginning of the year, at $44.3 million.
Recursion is expected to report earnings again on Feb. 26, with Wall Street looking for a per-share loss of $0.46 for the fourth quarter.
Recursion Partners with Nvidia
Management may provide more color about its partnership with Nvidia on the earnings call, as Recursion works to develop BioHive-1, its on-premise supercomputer. Aiming for completion in the first half of 2024, it's targeted to be the most powerful supercomputer owned and operated by any biopharma company.
Notably, Recursion's proprietary RecursionOS has access to about 50 human cell types, an in-house chemical library of approximately 1.7 million compounds, and an in silico library of over 1 trillion small molecules helmed by a team of 550 life scientists and computational and technical experts - a massive data set that can be leveraged and optimized via AI.
Also in partnership with Nvidia, Recursion is developing its LOWE drug discovery software and interface, which the company claims "can be used by any of our scientists from the comfort of their laptop." Apart from in-house use, Recursion can sell the LOWE software to other biotech companies, providing it with another revenue stream.
Separately, three drug candidates from Recursion Pharmaceuticals are currently undergoing Phase 2 clinical trials. REC-994 is being evaluated for safety, tolerability, and potential effectiveness in treating patients with cerebral cavernous malformation (CCM), a rare neurological condition characterized by abnormal blood vessel development in the brain. REC-2282 is being investigated for patients with Neurofibromatosis Type 2 (NF2), a genetic disorder that causes tumors to grow on nerves and other tissues, while REC-4881 is being studied for gastrointestinal conditions and specific cancer mutations.
Finally, Recursion has upgraded its partnership with pharma giant Bayer, under which Bayer will pay Recursion increased per-program milestones, which may be up to $1.5B for up to 7 oncology programs, as well as royalties on net sales.
What Do Analysts Expect from RXRX Stock?
Forward revenue growth for RXRX is pegged at 72.9%, which is well above the healthcare sector median. However, at 55 times forward revenue, the shares are priced at a premium.
Analysts remain somewhat optimistic about Recursion stock, which has an average rating of “Moderate Buy” from the 7 analysts in coverage. However, the mean target price of $12.33 is a premium of just 1.5% to current levels, indicating additional upside potential may be limited from here.
